The Secret “Shanghai Accord”

Posted On Mar 24, 2016 By Dave Gonigam

  • Is the Fed hawkish? Dovish? Or just a bunch of turkeys?
  • The secret deal hatched in Shanghai last month…
  • … that amounts to “the dollar takedown of 2016”
  • A chart that signals danger for stocks… and a catalyst for a lousy April
  • Territory lost in the war on cash
  • A primer in the war on cash… the war on cash and its parallels to Vegas… the first resort of money-grubbing local governments… and more!

Memo to the Financial Times: Can y’all make up your mind?

Both of these stories were posted to the Web today…

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Maybe we’re being too hard on the editors of the salmon-colored rag. After all, the Fed itself is sending mixed signals.

So what’s really going on? We’ll get to that momentarily…

But right now we return to the summit of G-20 finance ministers and central bankers in Shanghai a month ago.

We had no shortage of fun with that. Treasury Secretary Jacob Lew said the summit would produce no “emergency response” to the market turmoil that dominated the first few weeks of 2016.

“This is not a moment of crisis,” he said — even as the International Monetary Fund was urging the G-20 to pursue “bold multilateral actions to boost growth and contain risk.” Heh…

In the end, the G-20 generated no news — nothing for public consumption, that is.

Behind the scenes, however, the most influential G-20 leaders cooked up something Jim Rickards says “could be the most important financial development of 2016, with enormous implications for you and your portfolio.”

Jim’s sources have clued him in to a “secret side meeting” involving the United States, Europe, Japan, China and the IMF.

“This group really calls the shots,” Jim tells us. The U.S., Europe, Japan and China together represent over 70% of global GDP. The IMF acts as a kind of facilitator for these secret meetings, and an ‘enforcer’ for whatever agreements are reached behind closed doors.”

“The outcome of this secret side meeting was the biggest dollar takedown operation since the famous Plaza Accord of 1985,” Jim goes on.

Named for the New York hotel where it was reached, the Plaza Accord was held at a time the dollar had leaped nearly 50% against other major currencies in the previous five years — hurting U.S. exports and jobs.

“The Plaza Accord was a coordinated effort by the U.S., France, West Germany, Japan and the U.K. to weaken the dollar,” Jim recalls. “It worked. The dollar fell 30% over the next three years. The U.S. economy got a second wind, and the long Reagan-Bush expansion continued.”

Three decades later, the dollar sits near a 10-year high by several measures. “It’s time to trash the dollar again,” says Jim.

But this time, it’s a bit more complicated. “This time, the big winner won’t be the U.S.; it will be China. The losers will be the same — Japan and Europe.”

Secretary Lew’s don’t-worry-be-happy talk notwithstanding, those present at the secret side meeting were deeply concerned about China’s shock devaluation of the yuan last August.

“The G-20 central bankers and finance ministers agreed that China needed help,” Jim summarizes. “It’s the world’s second-largest economy, and it was falling fast. There was some danger it could take the world down with it.

“But further yuan devaluation was not possible (in the short run) because it was too destabilizing to markets.”

“The solution is to weaken the yuan on a relative basis by strengthening the currencies of China’s major trading partners, Japan and Europe,” Jim goes on.

“In other words, if the yen and euro get stronger, that’s the same as making the yuan weaker, but without the shock of Chinese devaluation.”

Since that meeting a month ago, the globe’s major central banks have gone to work implementing the plan…

  • March 10: The European Central Bank amped up its “QE” and pushed interest rates deeper into negative territory… but, importantly, ECB chief Mario Draghi signaled no further action would be necessary. Thus, the euro immediately leaped against the dollar
  • March 15: The Bank of Japan delivered a surprise by not amping up “QE.” Thus, the yen immediately leaped against the dollar
  • March 16: The Fed dialed back its plans for interest rate increases during 2016, from four to two. This too had the effect of weakening the dollar.

“Markets pay most attention to the yuan/dollar cross rate,” Jim elaborates; that’s the one the Chinese government manipulates.

“With Europe and Japan tightening and the U.S. easing at the same time,” Jim explains, “nobody noticed that China effectively devalued, because the yuan/dollar cross rate was unchanged. Neat!”

The impact on the dollar has been measurable. Here’s the U.S. dollar index (DXY) — a yardstick that’s relevant here because the euro and yen together make up 71% of the index.

TheDollarTakedown.png

What happened in Shanghai, Jim sums up, “was a coordinated devaluation that went unnoticed because China took no official action and the yuan/dollar cross rate was unchanged. It was an invisible devaluation of the yuan.

“The Shanghai Accord happened in stealth, but it will go down in history as a major turning point in the international monetary system.”

It also triggered a new “Kissinger Cross” trade this week. Jim and his research team figure you can parlay the dollar takedown of 2016 into double or maybe even triple your money come January of next year.

We took the wraps off the Kissinger Cross system four months ago. Since then, it’s generated gains of 68%… 135%… even 220%. Some of the trades are in the red, yes, but they still have nine months or longer to play out.

Jim’s posted a tutorial showing you just how the system works. Please note: His presentation will be taken offline next Monday night at midnight. Check it out right here while you still have the opportunity.

To the markets… where oil and stocks are once again moving in sympathy.

Crude is down another 2%-plus today, a barrel of West Texas Intermediate now fetching $38.85. Thus, the major U.S. stock indexes are adding to yesterday’s losses, the S&P 500 shedding nearly nine points at last check, to 2,028.

Gold is motionless at $1,220, still stunned from yesterday’s whacking.

The big economic number of the day is durable goods orders — down 2.8% in February. Take out the volatile transportation component (aircraft sales are all over the map from month to month) and it’s only a 1% slump, but that’s worse than the “expert consensus” was counting on.

Trader chatter is also focused on the People’s Bank of China weakening the yuan against the dollar overnight by the most in two months. The mainstream is chalking up this move to “an attempt to get ahead of any monetary tightening by the U.S. next month” (Financial Times)… but based on Jim’s analysis above, it looks more like the PBOC taking advantage of the Shanghai Accord’s outcome.

“Stocks remain under pressure,” says Greg Guenthner of our trading desk — despite a five-week rally.

“While a majority of stocks have enjoyed short-term bounces since mid-February, most stocks remain below their respective 200-day moving averages.”

As we noted yesterday, the VIX measure of volatility is close to its lows for the year. Unfortunately, says Greg, “that area has triggered some volatility spikes ever since the market started behaving badly last year.

CBOE Volatility Index

“If this rally is indeed losing significant steam,” Greg concludes, “it’s time to take some money off the table.”

Stocks look dicey from the macro side of things, too: “Earnings season will be bad for stocks,” says Dan Amoss, who keeps busy researching trades with both Jim Rickards and David Stockman.

“Corporate executives no longer have an earnings growth story to tell investors. Profit margins have peaked and are rolling over; executives are slashing 2016 earnings guidance; and write-offs of bad investments made during the bubble will continue.”

Then there’s the likelihood companies will dial down their share buybacks: “Buybacks have been propping up the market,” Dan goes on. “We have strong evidence that the bulk of day-to-day buying power in the market comes from corporations themselves — not from buy-and-hold investors. And because corporations suspend buyback activity during earnings season, that prop will be gone from early April until mid-May.

“The stock buyback prop will eventually collapse, because history shows that companies always buy high and sell low. When recessions hit and stock prices fall, companies become defensive and stop buying back stock.”

Another sign the war on cash is being lost: More and more Americans are using plastic for purchases under $5.

The folks at Creditcards.com perform periodic surveys of their users. Only two years ago, 22% of cardholders were using debit cards for small purchases. This year, that’s up to 27%. Among the  millennial generation, it’s 46%.

The percentage of Americans who use credit cards for under-$5 purchases remains the same, around 11%. Among millennials, it rises to 18%.

The reasons are similar to those we’ve seen in our mailbag in recent days — “cash back” and convenience. The number of retail card terminals is up from 7 million five years ago to 8.4 million now — think vending machines with card readers.

Oy… Debit cards have a flat merchant fee of 21 cents per transaction. That’s 21% of your $1 can of pop purchased with a debit card from a vending machine, getting siphoned off by Big Finance. And how many debit cards give you “cash back”?

Speaking of the war on cash, “I enjoy The 5,” a reader writes…

[Holding our breath for the inevitable “but.”]

… “but sometimes find info missing that would make the story complete.

“This cashless plan — who is behind it? Who is doing the pushing for this plan? What is the real reason, and why isn’t Congress doing their job to put legislation in place to stop it? Are they in on it also? For me, the articles about ‘cashless’ raise more questions that aren’t answered.”

The 5: It’s the nature of our daily hopscotch through the markets and the economy that we don’t explore topics in a systematic way.

That said, we presented a half-decent introduction to the war on cash last fall — including the “real reason” and the names of a couple individuals within the power elite providing the intellectual framework for other elites to latch onto. Hope it helps…

Several years ago,” a reader writes with a war-on-cash parable, “we took a trip to Las Vegas (pronounced ‘Lost Wages,’ if you will).

“Before we went, a woman who used to live there told me to divide up any money I was going to gamble with into separate envelopes for each day. I was to use Envelope One on Day One and so on. If you are ‘up’ after any day, you can also use your winnings, but if you are down and out, you cut off your losses then and there until the next day, when you take another envelope for that day.

“The reason she said this is that when you gamble, you can’t use cash, you have to surrender your cash for chips to use. After a while, you don’t ‘see’ the cash you are losing, just little plastic chips. You become numb to the losses.

“And so it goes with credit/debit cards, you don’t see the cash going out. You are just swiping plastic. Ergo, you tend to spend more. More spending creates more demand; more demand creates more inflation.

“One fellow at the gym I use stopped using his card and started using cash again to buy every little thing each day — morning coffee, roll and newspaper, lunch, snacks, etc. He said it made a huge difference by the end of each month and year, since it forced him to see that cash flowing out each day.

“Now they have set it up so people can use their ‘smart (?)’ phones to make purchases! YIKES!

Hope this helps anybody that ‘listens.’”

“It has been a while,” a reader chimes in on the topic of new taxes and weird fees, “but years ago, I had written how government would eventually raise revenue, and that was with property taxes.

“In the Maryland suburbs around Washington, D.C., they are already proposing tax rate increases since the values have not recovered to pre-2007 levels. Of course, they claim it is for ‘education’ or ‘health care,’ but the real reason is to fund their wish lists.

“They understand that if they raise the income tax, people and corporations will move, so that won’t solve the problem. So instead, they hit you with something you can’t fight, an increase in property taxes. If you don’t pay it, they sell your property. They know they will get the money. The same is true with water and sewer charges — raise the rates and there is nothing anyone can do. Again, if you don’t pay, the property, at least in Maryland, is sold to satisfy past due account.

“This is a sad end for many who have lived in their home for years only to find out they can’t afford the huge tax increases levied against them by the state. But the untold response by the state is, ‘This is to provide for many, so we don’t care about the few who lose.’”

The 5: In the summer of 2012, we chronicled an effort in North Dakota to repeal property taxes. “It means all of us are renters — none of us are homeowners,” a homemaker told USA Today.

True enough. Alas, the repeal referendum was crushed by a 3-1 margin. Not necessarily because people thought property taxes were a good thing, but because the proposal required the state to make up the revenue lost by local governments, and the proposal didn’t specify how.

Anyway… it’s one thing to see someone foreclosed because they can’t keep up with the mortgage. But to see someone lose a home — sometimes a paid-up home — on account of property taxes is just maddening…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. On the other hand, the phenomenon our last reader describes can prove quite lucrative if you know how to play it.

“One-day payouts,” is what Laissez Faire Club director Doug Hill calls them. “I just received one myself, for $1,847.”

And Doug says you wouldn’t be profiting from the misfortune of others. Far from it. Click here to check it out.

P.P.S. The U.S. stock market is closed tomorrow for Good Friday and The 5 will take the day off. We’re back as usual on Saturday with our countdown of the week’s highlights, 5 Things You Need to Know.


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